Does it still make sense to invest in an oil major? Energy companies have seen their influence on stock markets wane in recent years. In 2012, the S&P 500 value index in the US and the corresponding benchmark index for energy companies showed perfect correlation: now oil and gas companies are performing at half the level of the general market. And on the LSE, BP (BP:L), and Shell (RDSA:L), are not doing much better.
The reasons for this decline do not lie only in the recent period of cheap oil. The business model of the oil majors has been in crisis since the 1970s. With reserves depleted by the oil price shocks of that decade, oil majors have failed to grow their reserves adequately, not keeping up with emergent national oil companies – e.g. Saudi Aramco in Saudi Arabia - which have taken over the lion's share of production. Oil majors' progress has been marred by politics, as they enjoyed only limited access to the largest producing countries, such as Saudi Arabia, Iran, or Venezuela. By the end of 2014, in fadt, 57.3 per cent of global proved oil reserves were in five countries: Saudi Arabia, Iraq, Iran, Kuwait, and Venezuela, according to BP.
Rising costs were also to blame: upstream costs in the oil industry have risen threefold since 2000, although output is up just 14 per cent. The damage has been masked so far as big oil companies draw down on their cheap legacy reserves. Oil majors embarked on rounds of cost-cutting, but it was not enough to stop the blood-letting.
Decreasing sales led to a decline in the stock price: oil majors have tried to inflate dividends and raise share prices, by means of share buybacks, to stave off growing shareholder dissatisfaction. This strategy could last only for so long. Oil majors also paid for a strategic error they made in the 1990s: the production-sharing agreements in 1990s, with extra protections built in due to fears of low oil prices, meant that when oil prices rose again, oil company profits weren't as high and didn't translate into higher share prices.
The fallout of the Deepwater Horizon incident meant that oil majors had to spend more on health, safety and environmental controls, resulting in spiralling extra costs. Oil major’s poor stock market performances have got worse with the fall in oil prices since June 2014. Thus, the stock prices of ExxonMobil, Chevron, Shell, ConocoPhillips and BP dropped by as much as one-third in the first eight months of 2015.